Originally created 07/11/98

State gets bargain rate on latest sale of bonds

ATLANTA -- Home buyers aren't the only ones to benefit from current low interest rates. The state of Georgia took advantage of them this week when it sold $300 million in bonds at just 4.55 percent.

"We feel like if you can borrow money at 4.55 percent, you're doing pretty well," said Frank Thach, deputy director of the finance division of the Georgia State Financing and Investment Commission. The seven-member commission oversees state bond issues.

A group of companies headed by Lehman Brothers Inc. offered the best bid Tuesday when the state auctioned off the 20-year bonds. Another group of companies successfully bid for $27 million in 5-year bonds that carry an average interest rate of just 4.078 percent.

Most of the companies had already lined up investors to buy the bonds, which are especially attractive for two reasons. Georgia investors in the highest federal tax bracket like the bonds because the interest the state pays them is not taxed by the state or federal government.

The large number of Georgia investors sparked several companies to set up mutual funds that buy and sell the bonds. Those funds create a ready market for resale of the bonds, which provides large investors -- including insurance companies -- with a way to sell large blocks of bonds without driving down the price.

Insurance companies also like the stability of Georgia's bonds, according to Stephen C. Scott, vice president for municipal underwriting at Knox Wall & Co. Those companies invest in the bonds until a disaster forces them to sell a portion of their portfolio to pay claims. They like knowing the Georgia bonds will hold their value, he said.

Getting aggressive bids for such a low interest rate demonstrates market recognition of Georgia's financial strength, said Mr. Scott, who works for the company that underwrites more government bond issues in Georgia than any other. "I would say it was a very good interest rate."

All of the major bond rating services give Georgia their highest grade for financial soundness.

Proceeds from this week's bond sales, and another $440 million to be sold probably in late summer, will fund building projects around the state.

But one Republican legislator argues the state should take advantage of the good economy to repay its $5 billion in outstanding bonds and save the $400 million in annual debt payments.

"Essentially, we are borrowing when we don't need the money," said Rep. Mitchell Kaye of Marietta. "We're not spending based on needs. We're spending money based on how much money we have."

Mr. Kaye says Georgia should be like nine states that have no bonds outstanding.

"We don't have a balanced budget. It's a farce," he said. "Basically, our budget is as balanced as the federal government's."

Leveraging current tax receipts by issuing bonds can be a prudent financial strategy, though, according to Peter Eisemann, professor of finance at Georgia State University.

"If you constrain yourself to using only cash, you forgo several useful programs," he said. "The idea of borrowing is not too different from what a business or family does in managing their cash flow."


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